Bumper profits come at a heavy price

August 20, 2016

Medibank Private has headlined a year of bumper returns for private health insurers, announcing a 46 per cent surge in after-tax profits to reach $417.6 million, underlining concerns that the industry is pursuing financial returns at the expense of patients and service providers.

The latest snapshot of health fund finances shows that premium revenue across the industry surged by 6.4 per cent in the year to 30 June to reach $22 billion, far outstripping a 5.3 per cent increase in payouts ($19 billion), delivering insurers a healthy after-tax profit of $1.21 billion – up 8.8 per cent from the previous financial year.

The stunning results come amid widespread discontent about the behaviour of the health insurance, including large premium increases, complex and poorly explained health policies, arbitrary changes in coverage, routinely contesting and delaying payouts, and aggressive negotiation tactics with hospitals and other providers.

The Federal Government has announced changes to improve the value of health policies, including mandating minimum levels of cover and banning junk public hospital-only policies, and in his speech to the National Press Club AMA President Dr Michael Gannon lambasted the sector for prioritising profits over patients.

“Increasingly, we are seeing behaviour by large private health insurers that reflects that their ultimate accountability is to their shareholders,” Dr Gannon said. “If the actions of the funds continue unchecked and uncontested – especially their aggressive negotiations with hospitals and their attacks on the professionalism of doctors – we will inevitably see US-style managed care arrangements in place in Australia.”

While Medibank attributes much of its strong profit result to unexpectedly low claims, it has also been aggressively cutting costs and undertaking “claim control” initiatives.

Across the industry, insurers are looking to claim day on payouts, including by pushing more of the cost of treatment on to policyholders.

Patients faced a 6.9 per cent jump in out-of-pocket costs for hospital services last year, paying out on average $301.22.

Worryingly for Medibank and other insurers, there are signs that disenchanted policyholders are starting to vote with their wallets.

Medibank has reported a 2.6 per cent decline in customers, while premium revenue grew by just 5.1 per cent despite a Government-approved increase of 6.59 per cent, showing that many chose to downgrade their cover.

Industry-wide, the number of policies sold increased by just 0.57 per cent, less than half the rate of population growth, and the number insured grew only 0.46 per cent.

The industry’s struggles are only likely to intensify in coming months. Government measures to extend the freeze the threshold for the Medicare Levy Surcharge, $180,000 a year for families and $90,000 a year for singles, have come into effect. The thresholds will be frozen at current levels until 2021, when they will be roughly equivalent with average full-time incomes.

The Government is also planning to put a three-year freeze on the thresholds for the Private Health Insurance rebate before Parliament, which would see an increasing proportion of households kicked off the rebate.

Adding to Medibank’s woes, the consumer watchdog has taken the insurer to the Federal Court alleging it engaged in misleading and unconscionable conduct by cutting the benefits it would pay without informing policyholders.

Nonetheless, the industry is well placed financially. Total assets increased by almost a billion last financial year to reach $12.8 billion, and are growing at double the rate of liabilities, which were just $5.7 billion in 2015-16.